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How to buy … fleet finance

It is remarkably easy to buy fleet finance. You call one of the many suppliers of fleet finance – banks, finance and leasing companies or contract hire companies – tell them what you want, compare their prices and services and choose the one that seems offers what you want and the best combination of price and quality.

The hard bit, in fact, is to work out what you want. There are many different ways to finance your company cars, including outright purchase, contract hire, operating lease, contract purchase, finance lease, hire purchase, conditional sale, credit sale (as part of an employee car ownership scheme), salary sacrifice, loans, bank overdrafts and cash, and if you want to release cash from your fleet you could consider a sale and lease back too.

Broadly, these products fall into two camps: those that help you buy a vehicle and those where you pay for its use then hand it back. (Finance leases are a bit of a hybrid; treated for tax purposes like a lease, but for accounting purposes like a purchase.) When selecting your funding method you cannot avoid tax; the tax treatment for leasing and purchase is completely different. It is not sufficient to just look at the total amounts you will be paying the funder – or, even worse, to just look at the monthly payments. You need also to bring corporation tax, income tax and VAT into your sums – which should include the employer’s and the employee’s tax positions – and ideally you should use a discounted cash flow method to work out the cheapest solution.

Once you’ve determined the cheapest solution, that’s not the end of the matter. If your company is a PLC your finance director might be keen to keep liabilities off the balance sheet. If that is an over-riding consideration you may end up choosing, say, contract hire rather than a purchase method of finance, in order to keep the cars away from your balance sheet.

Are you happy to take the residual value risk in your company cars? Your choice of finance product will determine who takes this risk, you or the funder.

You should also consider how much flexibility you are going to need. If your business has a high level of staff turnover you might prefer to buy your own cars, or to finance them with a variable rate finance product such as bank overdraft or variable rate hire purchase, in order to avoid having to pay ‘break charges’ for terminating a lease early.

Some companies simply decide to give cash allowances to their employees and leave it to them to decide what car to get and how to finance it. But this doesn’t solve the problem, it just adds a range of new issues: How to ensure the driver gets a suitable car, and that they get it serviced and insured properly? After tax, is this really the cheapest option for the employee – and the employer? With many cash allowance schemes, nobody has actually done the sums to answer this question.

If your company is ‘cash-rich’ (ie it can use its own cash to buy cars) you may never have considered leasing. However, leasing can be attractive to cash rich businesses. Unlike most businesses, leasing companies can recover the VAT when they buy cars, so your lease rentals will be calculated on the purchase price of the car, net of VAT.

Each business is different and has different priorities, internal resources, tax positions and so on. No one product is going to be right for all businesses.